Role of Government in Market Economy - Coursework Example

Name) (Course) (University) Date of presentation: Lecturer: Question 3 Role of Government in Market Economy A market economy is an economic system in which decisions regarding production and distribution of goods and services are based on the forces of demand and supply. In such an economic system, the government plays no role in the production of goods and services. Another important feature of a market economy is that the means of production are privately owned for profit making. In practice, such an economic system does not exist because the government regulates market activities for various reasons and to varying degrees (Bhagwati, 2002). The following are some of the most important roles of government in a market economy: i. National Defense and the Public Good Provision and regulation of national defense services are an important reason why governments intervene in market economies. Essentially, national defense is a sensitive issue which cannot be left to the market forces. Unlike commodities such as computers, foodstuffs and clothing, people do not pay for each unit of national defense they consume; instead, it is purchased collectively for use by the entire nation (Graeme, 1999). This type of commodity is called public good because no individual or business can sell national defense to the citizens and stay in business. In addition to national defense, there are other essential public goods and services which require the role of the government. These services include insect and flood-control programs as well as regulation of radio and television signal broadcast over the airwaves (Paul, 2005). ii. Providing the Economy With A Legal Structure This is one of the most important roles of the government in a market economy and without which an economy may collapse. The function of providing the economy with a legal framework requires the government to ensure enactment of property rights and prompt enforcement of contracts. The function also requires the government to act as a referee by imposing penalties in case of foul play. In order for the government to perform this function effectively, the economy should be furnished with legislations, regulations and means for ensuring product quality and enforcement of contracts. Bilateral trade agreements and trade tariffs are some of the ways in which the government fulfills this task (Bockman, 2011). In his article, Tyler (2001) has argued that the government must implement and protect the rights to private property and any economic gains derived from the use of that property. In the absence of such assurances, people will not want to risk their money in ventures whose rewards will be consumed by the state or some other entity. The obligatory role of the government to protect private property extends to factories, land, stores and other tangible resources used in the production process. It also extends to intellectual property. In order to encourage and protect intellectual properties, the government issues exclusive rights to certain intellectual properties such as music, books, computer programs and films. The government also issues patents to protect other types of inventions such as designs, products and inventions. These exclusive rights give holders the right to sell and market their products freely (David, 2002). iii. Regulating and Maintaining Positive Competition Competition is the most optimal and efficient market mechanism through which resource supplies and producers respond to changes in market dynamics and consumer sovereignty. Therefore, the government has an important role to play in fighting non-competitive market behaviors such as monopoly. For this reason, almost every country has enacted anti-monopoly laws to promote desired business behavior and promote competition. In his book, Karagiannis (2001) has argued that governments maintain positive competition by improving institutional infrastructure. When there is an open and stable institutional framework, counter-competitive behaviors are easily eliminated (Bockman, 2011). iv. Redistribution of Income The government plays an indispensable role in providing relief to the poor, disabled and unemployed citizens. Social security, Medicare and welfare are some of the government initiated programs which support the sick, poor and the elderly. Essentially, these social programs are built on transferring income and wealth from the high-income groups to the limited income ones through various mechanisms such as progressive taxes. Other means of redistributing income include price support programs (such as farm subsidies and low interest loans). According to Paul (2005), the government attempts to avoid abrupt and large changes in income, in prices and in the availability of locally produced goods and services. Thus, effective market can create stability in resource supply and prices by allowing distribution of commodities (Mises, 2001). v. Promoting economic growth and stability In any market economy system, the government plays an indispensable role in promoting macro-economic growth. This is achieved through fighting unemployment and inflation, increasing national gross domestic product and by making appropriate changes in monetary and fiscal policies. Good fiscal policies mean efficient use of taxes for the ultimate stabilization of the economy, and are usually spearheaded by a government department in charge of finances. Similarly, monetary policies signify reserve requirements, use of interest rates and money supply, all of which are important roles which cannot be entrusted on market forces (Pugel, 2007). According to Smith (2009) governments intervene in free market economies in order to improve market infrastructure by developing roads, railway lines, market facilities, health control systems and water points. Projects necessary for market-sale development such as auction yards should be properly designed and located. When this is the case, it becomes easy for a competitive market to develop. vi. Resource Conservation The resource conservation objective of government intervention in free market concentrates on preserving a country’s natural resources so as to ensure economic efficiency and independence. This objective of resource conservation is important because market activities may not work towards the goal of resource conservation. It is in fact argued that market systems rely on natural resource endowment to survive. This has the impact of increasing degradation of resources due to integration of areas into commodity markets (Bhagwati, 2002). vii. Sovereignty and Political Independence The sovereignty and political independence objectives aim at preserving a satisfactory degree of economic and political autonomy. Although increased trade may be seen as acting in contrary to this objective, effective government intervention reinforces the interdependence by enabling a country to supply its needs easily. In some cases, the government intervenes in a free market to prevent importation of harmful products such as outlawed medicines and culturally offending commodities (Pugel, 2007). In India, marketing of beef products is illegal and therefore the governments intervene in trade to ensure that such products are not sold in the country. Similarly many other countries intervene in trade to ensure that products that may threaten state security such as guns and explosives are not sold freely. viii. Development of Domestic Industry The government can intervene in a free market system with the aim of protecting the growth of domestic industries. This is especially the case in poor and developing countries whose industries cannot compete with the developed countries (Paul, 2005). The government protects domestic industries by offering trade subsidies and by imposing tariffs and import quotas on products that may hinder the growth of domestic industries. In the absence of these trade subsidies and tariffs, cheap imports from foreign industries will flood the domestic market and hence hinder the development of domestic industries. According to Bockman (2011), countries whose industries are relatively young consider government intervention as a positive case for expansion of the manufacturing sector. This consideration is based on the general assumption that the manufacturing sector will in the long run become a leading economic sector with the capacity to offer employment opportunities (Jordana& David, 2005). Conclusion Despite trends towards free markets across the world, markets in general remain subordinate instruments of political systems and their policies. Therefore, government interventions must work to facilitate market competition and to help the market achieve desired national policy objectives. Hence, there can never be a truly free market economy. In order for any market to function effectively, government interventions and policies must be able to address the objective of rationalizing trade. When such intervention is in place, it often results in efforts to make marketing practices conform mechanically to modern models. Inasmuch as there can never be a free market economy, any act of government intervention should take into account the capacity of the marketing network to accommodate the intervention. All policies should be aimed at working with the existing marketing structures and not replacing them. Moreover, government attempts to intervene in a free market economy should not raise the cost of marketing because this will hurt consumers or distort resource allocation and hence damage the economy. Therefore, government intervention should be based on the consideration that trading is a necessary and socially desirable activity although carried out in an environment of risk. It is also important for the government to consider whether it is really necessary to intervene in the trade and what will happen in future if the intervention is removed. In general, it is recommended that the government plays a facilitating role rather than a direct role in market intervention. Reference Bhagwati, J. (2002). Free Trade Today. Princeton: Princeton University Press. Bockman, J. (2011). Markets in the name of Socialism: The Left-Wing origins of Neoliberalism. Stanford University Press. David, W. C. (2002). Comparative Economic Systems. University of Calgary Press, p.1. Graeme, S. (1999). Global Transition: A General Theory. London: Palgrave Macmillan Jordana, J. and David, L. (2005). The Diffusion of Regulatory Capitalism in Latin America: Sectoral and National Channels in the Making of a New Order". Annals of the American Academy of Political and Social Science, 598, p. 102–124. Karagiannis, N. (2001). Key Economic and Politico-Institutional Elements Of Modern Interventionism. Social and Economic Studies, 50(3/4), p. 19–21. Mises, L. (2001). Interventionism: An Economic Analysis. New York: The Foundation for Economic Education, Inc.. pp. 1–51. Paul, M. J. (2005). A Glossary of Political Economy Terms, Market economy. Auburn University. Pugel, T. (2007). International Economics. New York: McGraw-Hill Irwin. Smith, A. (2009). An Inquiry into the Nature and Causes of the Wealth of Nations. Digireads Publishing. Tyler, J. W. (2001). Smugglers & Patriots: Boston Merchants and the Advent of the American Revolution. Boston: Northeastern University Press. Read More